Abstract/Summary

This thesis makes an original contribution to the literature by examining how the disparities between acquirer’s and target’s firm characteristics, namely the corporate culture and credit rating levels, affect the multiple dimensions of M&As. I investigate how the complementary fitness of acquirer’s and target’s characteristics in a deal impacts acquisition wealth and deal characteristics. I first study the effect of corporate cultural distance between acquirers and targets on M&As based on unique corporate culture data from EIRIS. The results show that deals with larger corporate cultural distance have lower acquirer cumulative abnormal returns (CARs), lower synergy returns around the deal announcements, and weaker stock performance in the long-run. These results provide empirical evidence for the “cultural clashes” theory documented in the previous literature and suggest that market perceives corporate cultural distance as a major risk in the post-acquisition integration process. Furthermore, I find that corporate cultural distance reduces the probability of deal completion and increases the time taken to complete a deal, reflecting the existence of negotiation frictions under cultural disparity. In addition, the percentage of payment made in stock is found to be lower for deals with larger corporate cultural distance. The results are robust after controlling for national cultural distance, firm and deal characteristics. This is the first study that formally looks into the effect of corporate culture disparity on M&As using a wide coverage of international data. Next, I focus on another acquirer-target disparity. I examine the impact of acquirertarget credit rating distance on M&A wealth. I find that deals with larger credit rating distance benefit from higher acquirer’s, target’s and synergy returns at the time of the announcement. Such a positive wealth effect is also supported in the long-run performance test. These results provide evidence on the benefit of financial capability transfer in the combined entity after acquisitions such that valuable financial synergy can be generated by efficiently utilizing the pooled financing abilities of the merging firms. Consequently, the problem of underinvestment due to financial constraint and the issue of free-cash flow under financial slack can be alleviated with such efficient sharing of financing resources. I then extend the study on acquirer-target credit rating distance in the final empirical chapter to examine its impact on the various aspects of deal transactions and characteristics. I show that deals with larger credit rating distance are more likely to use cash as the method of payment, possibly due to the fact that raised debt can be better absorbed by the pooled financing capability after the acquisition. In addition, I also find that deals with larger credit rating distance have higher success rates and tend to take less time to complete, reflecting the motivation from both sides to complete the deals in order to harvest the potential financial synergy gain. Furthermore, I illustrate the dynamics of credit rating changes around acquisitions and how they are associated with firms’ relative credit ratings in a deal. Overall, this thesis demonstrates the importance of taking the differences between acquirers’ and targets’ “soft” characteristics into consideration when evaluating acquisitions and processing deals. The studies contribute to the finance literature with original findings under the comprehensive event study framework employed. They also offer practical implications for managers and financial advisors such that future potential M&A deals can be assessed with greater meticulousness for maximum wealth creation.